Session 136 PD - Update on the Recent Developments and Financial Status of U.S. Social

Security

Moderator: Krzysztof M. Ostaszewski, FSA, CERA, MAAA, Ph.D.

Presenters:

Peter Diamond, Ph.D. Stephen C. Goss, ASA, MAAA

SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

The Future of Social Security

Peter DiamondSociety of Actuaries

October 17, 2017

OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll

[Under Intermediate Assumptions]

Source: Figure II.D2. The 2017 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 2017. Social Security Administration.

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History

1977 legislation1983 Greenspan Commission and legislation1994-6 Advisory Council report but no legislation2001, 2010 Commissions but no legislation

Issues

Legislation before 2034Borrowing by Social SecurityCOLA for benefits in payment

Actuarial balance in Trustees Reportsafter 1982 overindexing

• Report TF ratio 4 years ahead 75-year actuarial balance

• 1973 .76 -0.32• 1974 .51/.48* -2.98• 1975 .24 -5.32• 1976 .21 -7.96• 1977 .09 -8.20

* two projections 3

75-year deficit reduced:• 1977 Trustees Report: 8.20 percent of taxable payroll • 1978 Trustees Report: 1.40 percent of taxable payroll

Short run as seen in 1978 Trustees Report:• After 1980 it is estimated that income will exceed outgo in

every year until after the turn of the century.

After1977 legislation introducing automatic wage indexing for initial benefits

Source: Annual Reports of the Board of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC.

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Projected deficits: tax revenue gap as a percentage of total cost, 1983-1991 (1982 Trustees Report)

-7.2%

-2.8%

0.3% 1.1%

-20%

-10%

0%

10%

1983 1984 1985 1986 1987 1988 1989 1990 1991Source: U.S. Social Security Administration. 1982. The 1982 Annual Report of the Board of the Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 5

Absent legislation, unable to pay July 1983 benefits on time.

Greenspan Commission: short-run problem

Recommends that $150-$200 billion in either additional

income or in decreased outgo (or a combination of both)

should be provided for the OASDI Trust Funds in calendar

years 1983-89.

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Greenspan Commission split on long-term solution(0.58 of the 1.80 deficit)

8 Republican appointees

• Increase the normal retirement age (NRA) from 65 to 66, starting with those age 62 in 2000.

• Then adjust the NRA to keep the ratio of retirement-life expectancy to potential working lifetime as it was in 1990.

• The minimum age for Medicare eligibility would be the NRA.

5 Democratic appointees

• Increase the payroll tax rate by 0.92 percent starting in 2010,

• with the employee’s share of the increase offset by a refundable income-tax credit

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Proposed amendments

J.J. Pickle (D-TX)

• Increase the age for full benefits to 66 by 2009 and to 67 by 2027.

• Early retirement stays at 62.

• Approved: 228 (152-R, 76-D)

to 202 (14-R, 188-D)

C. Pepper (D-FL)

• Increase the tax rate from 12.40 percent to 13.46 in 2010.

• Rejected: 296 (165-R, 131-D)

to 132 (1-R, 131-D)

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Provision Percent of Solution Short-term Long-term

Coverage extensions 16 20

Changes affecting beneficiaries 39 70

Changes affecting contributors 44 10Other 1 0

Source: Table 2, 3. Gregory, J., Bethell, T., Reno, V. and Veghte, B.W., 2010. Strengthening Social Security for the long run. Social Security Brief, 35, pp.1-15.

Projected Impact of 1983 Legislation on 1983-1989 Finances and 75-year Balance

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Projected Deficits: Tax Revenue Gap as a Percentage of Total Cost 2017 – 2050 (2017 Trustees Report)

Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 11

-2.8%

-21.4%-20.1%

-30%

-20%

-10%

0%

2017 2021 2025 2029 2033 2037 2041 2045 2049

75- year Actuarial Deficit 2017 – 2034 (projected from 2017 Trustees Report)

Source: Data from Social Security Administration OCACT; Social Security Administration Trustees Report (2017) 12

2.83%

4.11%

0%

1%

2%

3%

4%

5%

2017 2019 2021 2023 2025 2027 2029 2031 2033

Proposals including borrowing from the Treasury

• PSA proposal from Advisory Council, 1994-96 (Clinton)• Issue bonds to the public for the next 40 years to be fully

repaid.

• President's Commission to Strengthen Social Security, 2001 (Bush)

• Temporary transfers from general revenue would be needed to keep the Trust Fund solvent between 2025 and 2054.

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Increase / reduction of federal debt in 2050 (as percent of GDP) resulting from proposed Social Security plans

-28.2%-25.9%

93.7%40.1%

79.7%1.2%

65.3%20.8%

26.5%3.8%

19.3%

-50% 0% 50% 100%

BallDiamond/Orszag

Sununu/RyanShaw

Demint (2003)Kolbe/Boyd

JohnsonGraham

HagelPozenBush

Source: James Horney and Richard Kogan. 2005. “Private Accounts Would Substantially Increase Federal Debt and Interest Payments.” Washington, DC: Center on Budget and Policy Priorities.

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In the early 2000s, all of the GOP plans for Social Security would have borrowed to cover the transition costs of setting up individual accounts.

Comparison of two bills: tax revenue Social Security Reform Act of 2016 Sam Johnson

• No change in payroll tax rate

• No change in payroll tax base

Social Security 2100 ActJohn Larson

• Increase the payroll tax rate, reaching 14.8% in 2042 +1.78

• Apply OASDI tax rate to earnings above $400k, with an increase in benefits +1.88

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Comparison of two bills: benefits Social Security Reform Act of 2016 Sam Johnson

• Change benefit formula +1.19• Increase age for full benefits +0.84• End taxation of benefits -0.40

• Decrease COLA +1.25

• Change special minimum -0.23• Other +0.12

Social Security 2100 ActJohn Larson

• Increase benefit formula -0.24

• Change taxation of benefits -0.19

• Increase COLA -0.39

• Change special minimum -0.13

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Cost-Of-Living Adjustment and the Consumer Price Index

• Current law: CPI-W: • Consumer Price Index for Urban Wage Earners and Clerical

Workers.

• Johnson: Chained CPI (C-CPI-U): • OACT estimates a decrease of 0.3 percentage point per year.

• Increase benefits for all beneficiaries who have been eligible for at least 20 years.

• Larson: CPI-E: • OACT estimates an increase of 0.2 percentage point per year.

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At What Price? Conceptualizing and Measuring

Cost-of-Living and Price Indexes

it is important that public policy makers and private users understand the relationships between the ways in which price indexes are designed and how they serve—or fail to serve—the various purposes for which they are employed.

Panel on Conceptual, Measurement, and Other Statistical Issues in Developing Cost-of-Living Indexes, Charles Schultze and Christopher Mackie, Editors, National Academies Press (2002), p. 191. 18

Purposes for indexed changes of benefits in payment

• Intertemporal patterns of benefits in payment retirees would want subject to a budgetary lifetime PDV constraint.

• Suitable relationships between incomes of retirees and their earlier earnings.

• Suitable relationship between incomes of retirees and earnings of contemporaneous workers.

• Reflects overall resources available.19

At What Price?

• A cost-of-goods index (COGI): measures the change in expenditures required by a

household to purchase a fixed weight basket of goods and services

• A cost-of-living index (COLI): measures the change in expenditures a household would

have to make in order to maintain a given standard of living.

P. 1-2. 20

At What Price? • the price data used to produce the CPI are collected from

retail stores and not directly from households,• as a consequence, it is impossible to investigate satisfactorily

the two major aggregation issues: • To what extent does inflation or changes in living costs

differ among the various economic and demographic groups?

• And to what extent would a democratic index behave differently from a plutocratic one?

P. 5.21

Shortcomings of a COLI• Assumes the same indifference curve in two years.

But preferences change with aging, with consumption history, and with the consumption of others.

• Uses a "representative consumer" with the average consumption of the entire economy. But consumption patterns vary greatly.

• Medical costs reflect both changes in health and a changing commodity with special social concern.

• Products change and enter and exit the market, making some comparisons difficult.

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Indexed adjustments of defined benefits in payment

• Price changes: • Canada, France, USA.

• Wage changes minus a constant:• Norway, Sweden

• Mix of price and wage changes: • Finland, Switzerland

• Includes adjustment for financial balance:• Germany, Spain, Sweden

• Source: OECD, Pensions at a Glance 2015: OECD and G20 indicators. 23

Reform legislation questions

• Last minute is inevitable?

• Waiting for last minute legislation favors tax increases relative to benefit cuts?

• Last minute is OK: see 1983?

• Just form a commission?

• What type of commission?

• Role of public views24

Bipartisan Policy Center Commission on Retirement Security and Personal Savings

(Conrad-Lockhart) 2016

In the interest of encouraging compromise and informing

the public debate, the commissioners operated under the

restriction of a roughly 50-50 balance between increased

revenues and changes to benefits in future years.

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Social Security Actuarial StatusUpdate and Perspective

Society of Actuaries Annual Meeting, Session 136

Steve Goss, Chief Actuary, Social Security Administration October 17, 2017

Method for Social Security Financing

1) Payroll tax invested in Trust FundsAlso tax on benefits and interest income

2) Pay-As-You-Go FinancingMaintain contingency reserve because----

No significant borrowing authorityMust warn Congress to act in time

3) Annual Trustees Reports since 1941Congress has always acted in time

Trust fund reserve depletion is the trigger2

SOLVENCY: OASDI Trust Fund Reserve Depletion 2034 (same as last year)o Reserve depletion date varied from 2029 to 2042 in reports over the past 25 years (1992-2017) o DI Trust Fund — reserve depletion in 2028, five years later than last year

o Due largely to lower recent and near-term disability applications and incidence rate

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0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Social Security Trust Fund RatiosAssets as Percent of Annual Cost

Trustees Report Intermediate Projections

OASDI 2017TROASI 2017TRDI 2017TROASDI 2016TROASI 2016TRDI 2016TR

Historical

Tax RateReallocation

DI

OASDI

OASI

Changes in Solvency Projections for the DI Trust Fund; 2008 Recession Offset “New Economy”; Cycles Still Happen

4

0

50

100

150

200

250

1990 1995 2000 2005 2010 2015 2020 2025

Rese

rves

as %

of A

nnua

l Cos

t

DI Trust Fund Ratio in 1995, 2008, 2016, 2017 Trustees Reports

1995TR

2008TR

2016TR

2017TR

"New Economy" irrational

exuberance

2008 Recession

back to reality

Tax-Rate Reallocation

Big News: Applications for Disability Benefits Still FallingAt the peak of the last economic cycle in 2007, applications were low, but increased rapidly in the recession to over 2 million in 2010. In 2016, with the economy still not

fully recovered, applications were below the 2007 level. 2017 even lower!!

51.5

1.6

1.7

1.8

1.9

2.0

2.1

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

(milli

ons)

Total Social Security Disability Receipts by Calendar Year:Historical and Intermediate Assumptions for 2012 through 2017 Trustees Reports

2012TR

2017TR

2016TR

2015TR

2014TR2013TR

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Even with the Economy NOT Yet Back to Mid-CycleDespite the low unemployment rate (4.8 percent in 2016),

employment is estimated to be about 2 percent below full employment level

0.95

0.96

0.97

0.98

0.99

1

1.01

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Ratio of Current Employment to Full Employment

2016 TR2017 TR

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So… What is the Cash-Flow Shortfall for DI?DI Annual Cost and Non-Interest Income as Percent of Taxable Payroll

93% of scheduled benefits still payable at trust fund reserve depletion

0%

1%

2%

3%

4%

5%

2005 2015 2025 2035 2045 2055 2065 2075 2085 2095

Calendar year

Cost: Scheduled and payable benefits

Non-interestIncome

Payable benefits as percentof scheduled benefits:2016-27: 100%2028: 93%2091: 82%

Cost: Scheduled but not fully payable benefits

Expenditures: Payable benefits = income after trust fund depletion in 2028

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OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll Persistent Negative Annual Cash-Flow Balance Starting in 2010

77% of scheduled benefits still payable at trust fund reserve depletion

0%

5%

10%

15%

20%

25%

2005 2015 2025 2035 2045 2055 2065 2075 2085 2095Calendar year

Cost: Scheduled and payable benefits

Non-interest Income

Payable benefits as percentof scheduled benefits:2016-33: 100%2034: 77%2091: 73%

Cost: Scheduled but not fully payable benefits

Expenditures: Payable benefits = income after trust fund depletion in 2034

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SUSTAINABILITY: Cost as Percent of GDP Rises from a 4.2-percent average in 1990-2008, to about 6.1% by 2037, then

declines to under 5.9% by 2050, and generally increases to 6.1% by 2091

0%

2%

4%

6%

8%

10%

1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090Calendar year

Non-interest Income

Historical Estimated

Cost

Why? Aging (change in age distribution)mainly due to drop in birth rates

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0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Aged Dependency Ratio 2017 TRPopulation 65+/(20-64)

Actual and TR Intermediate

TFR remains at 3.0 after 1964

TFR remains at 3.3 after 1964

How About Labor Force ParticipationTrustees: Age-sex adjusted labor force participation rate recovers; rises with longevity

Recent Technical Panel: No further recovery; then males drop, females stable

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0.50

0.55

0.60

0.65

0.70

0.75

0.80

1981 1991 2001 2011 2021 2031 2041 2051 2061 2071 2081 2091

Labor force participation rate (16 and older, age-sex adjusted to 2011 population)

Age-sex adjusted

Historical Projected

Males (age adjusted)

Females (age adjusted)

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But, Wait—How About Budget Scoring?How do entitlements affect Federal debt?

Source: Congressional Budget Office, June 2016

Take Note. Budget Scoring Is Inconsistent with the Law, and All Past Experience.

• See Actuarial Opinion in the 2017 TR (also 2014, 2015, and 2016 TR)

1) Reserve redemptions through 2034 just spend the excess revenues collected and invested in earlier years. This just replaces debt owed to the TF with debt owed to the public

2) If reserves deplete in 2034, the $12.5 trillion unfunded obligation through 2091 cannot be paid under the law. Budget deems these “expenditures” creating publicly held debt !!!

3) Therefore-----Trust Fund operations have NO direct effect on total Federal debt subject to ceiling in any year—and no net effect on publicly held debt over time.

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So—What If We Projected Federal Debt Consistent With the Law? Dramatic difference back in 2015!!!!

0

20

40

60

80

100

120

140

160

180

200

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090

Publi

cly H

eld D

ebt a

s a Pe

rcent

age o

f GDP

Projected Federal Debt Held by the Public: CBO Baseline (Assuming OASDI & HI Unfunded Obligations Are Paid by Borrowing From the Public) vs.

Assuming Current Law

CBO Baseline July 2015

Less OASDI Unfunded Obligations (CBO Dec 2015)

Less OASDI (CBO Dec 2015) and HI (Trustees 2015)Unfunded Obligations

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But starting 2016, CBO projects the total Federal Budget only 30 years!

0

20

40

60

80

100

120

140

160

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

Debt

as P

erce

nt of

GDP

Projected Federal Debt Held by the Public: CBO Baseline (Assuming OASDI & HI Unfunded Obligations Are Paid by Borrowing From the Public) vs. Assuming Current Law

CBO Baseline July 2016

Less OASDI Unfunded Obligations (2016 Trustees Projections)

Less OASDI&HI Unfunded Obligations (2016 Trustees Projections)

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The Bottom Line• Long-term projections provide information to assess

solvency and changes needed to eliminate shortfalls• If trust fund reserves were to deplete:

– Full benefits cannot be paid timely– NO pressure on the Budget or Federal Debt– So Congress must and WILL act, as always

• Straightforward solutions:– Add revenue and/or lower cost for OASDI

• Comprehensive changes implemented by 2034

How to Fix Social Security Long-TermMake choices addressing OASDI deficits 2034-2091:

• Raise scheduled revenue after 2033 by about 33%: increase revenue from 4.6 to 6.1% of GDP

• Reduce scheduled benefits after 2033 by about 25%: lower benefits from 6.1 to 4.6% of GDP

• Or some combination of the two• Achieve “sustainable solvency”

– Trust Fund reserves stable or rising as percent of annual cost

– This is a new concept since about 1995---- Kerry/Simpson and the 1994-96 Advisory Council

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Questions----------------• If “aging” is the problem, what to do?

– Index the normal retirement age after it hits 67?? • Remember longevity is just a small part of the future aging

– How to address the lower birth rate??

• Fewer children pay more of their earnings?– Increase payroll tax rate, or– Tax investment income (like the ACA)

• Elders get lower monthly benefits?– Reduce the benefit replacement rate below 40% average?– What implications given the demise of private defined benefit

pension plans?18

For More Information Go Tohttp://www.ssa.gov/oact/

• There you will find:– 2017 and all prior OASDI Trustees Reports– Detailed single-year tables for recent reports– Our estimates for comprehensive proposals– Our estimates for the individual provisions– Actuarial notes; including replacement rates– Actuarial studies– Extensive databases– Congressional testimonies– Presentations like this

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